From: Douglas Marvode III [firstname.lastname@example.org]
I would first like to thank the SEC and the commission for this second opportunity to address the issue of illegal Naked Shorting. I hope enough time has passed since 1999 that the SEC fully understands the implications of what Illegal Naked Short selling has done, and is doing, to our markets. If the current abuses of Naked shorting are allowed to continue, I fear our economy will be ruined for decades to come.
Before I answer the questions that you are seeking comment on, I would first like to address a few issues of concern. Is it safe to assume that since you are proposing new rules to halt illegal naked short selling that there are currently no rules in place to thwart this illegal abuse? If there are rules in place, why are they not being fully enforced since the SEC has now admitted that this is a problem? If there are rules in place, but due to loopholes these abuses have been allowed to go on, I strongly recommend you make certain that the new rules do not allow for loopholes for this abuse to continue and I urge you to make the penalties very stiff and harsh for any violators.
I would also ask the SEC and this commission to put into place a way for shareholders to report continued abuses by these illegal traders who facilitate Naked Short Sales, and for there to be a fast response and turn around time on such complaints.
The next issue that is of the biggest concern to me is I have not seen the SEC address how to resolve the Illegal Naked Short shares that exist on the books today. This problem can not be ignored. I realize the implications of firms having to rectify there illegal activity could reach the BILLIONS, but this must be corrected for the new proposed rules to exist and be effective. No matter what changes you bring about, someone needs to oversee and force all these fraudulent counterfeited shares to be covered. This is an enforcement issue and I pray it is being addressed. If not, it will be a tragedy of justice.
One finally point I would like to make is that regardless of the company whose shares have been manipulated, it is innocent investors who have been harmed also by this Illegal Naked Shorting. Even if the targeted company is not on the up and up itself, it does not justify innocent investors being illegally drained of their equity by fraudulent traders who facilitate naked short sales and illegally profit. The reason I bring up this point is because many people who defend the actions of Naked Shorting try to put the blame on the company itself and point the finger at bad business plans or poor management. Again, regardless of that, it does not give anyone a free ticket to manipulate a stock and steal from the innocent investor.
Thank you again for the opportunity to share my concerns on this very troubling issue. Below I have tried to answer the questions you are seeking comment on to the best of my ability, with a fair and open mind.
Douglas Marvode III
Q. What harms result from naked short selling? Conversely, what benefits accrue from naked short selling?
A. Naked short selling harms securities in many ways. The first being the downward selling pressure it places on stocks. When these abusers are simply allowed to counterfeit shares of a particular stock and sell into the bid or constantly be sitting on the ask, it can drive a stock into the ground or never allow for it to rise in price reflect the true market value. This can further be exacerbated when legitimate shareholders began to panic and sell as the stock is plummeting. The Illegal activity of Naked Shorting, also causes MASSIVE DILLUTION to the company and its existing shareholders. This MASSIVE DILLUTION most often crushes small companies.
I personally see NO benefit to Naked short selling, as it is simply a manipulative, abusive loophole, used to steal and drain all the equity from the current shareholders, while destroying the company whose shares they have counterfeited.
Q. Are there negative tax consequences associated with naked short selling, in terms of dividends paid or otherwise?
A. There are ASTRONOMICAL negative and ILLEGAL tax consequences to both our Local, State, and Federal Government in several ways. The first being that on a naked short sale, the person who has engaged the naked short sale only has to pay taxes when or if they ever "cover" that security in the open market. As stated by the SEC in this proposal, it is often not the intention of these naked short sellers to EVER cover there naked short positions. This in and of itself has a constant negative effect on the stock price and in many instances makes it impossible for these companies to raise future capital needed to stay in business, thus forcing them into bankruptcy. When this happens the naked shorter never covers his position and never pays taxes on his gains.
When a company is a victim of such abuses they often can no longer raise funds and are forced to close up shop thereby laying people off. People that were working and paying taxes. Some of those same people will be forced to file unemployment claims and will not longer be part of the working class paying taxes, but instead they will be receiving benefits from our Government.
Also, the company itself, if it were not destroyed, could have been able to grow and become profitable and yet with naked shorting, those taxes that the company could have paid to our Government will never be realized.
Another negative tax consequence that Illegal Naked Shorting places on our Local, State, and Federal Government, is the tax write off that all the shareholders can now claim. This is also exacerbated by the fact that, by its nature, naked shorting of shares results in countless more shares then were OFFICIALLY authorized by the company, meaning that many people are taking a write off on shares that actually did not exist.
So as well as the naked short draining equity from the common shareholders, they are in effect, STEALING from the Government by "counterfeiting" shares and thus creating losses that do not and should not exist and they steal from the Govt tax base by destroying companies who could have continued to employ tax paying workers.
I think the IRS should be involved in this as the losses to our Government no doubt reach the billions of dollars.
Q. What is the appropriate manner by which short sellers can comply with the requirement to have "reasonable grounds" to believe that securities sold short could be borrowed? Should short sellers be permitted to rely on blanket assurances that stock is available for borrowing, i.e., "hard to borrow" or "easy to borrow" lists? Is the equity lending market transparent enough to allow an efficient means of creating these lists?
A. Short sellers SHOULD NOT be permitted to rely on blanket assurances that stock is available for borrowing as anyone can make that claim and this will just be a "loophole" used to once again take advantage of and abuse the system, as evidence by the current situation we are faced with. If someone wants to sell something that I own, they should have to contact and ask me for my permission to sell it.
Q. Should short sales effected by a market maker in connection with bona fide market making be excepted from the proposed "locate" requirements? Should the exception be tied to certain qualifications or conditions? If so, what should these qualifications or conditions be?
A. No, I do not think a bona fide marker maker should be exempt from the proposed locate requirements. This again would establish another loophole for the system to be abused like it is now.
Q. Should the proposed additional delivery requirements be limited to securities in which there are significant failures to deliver? If so, is the proposed threshold an accurate indication of securities with excessive fails to deliver? Should it be higher or lower? Should additional criteria be used?
A. No, this should not be limited to securities where there is a significant failure to deliver. If someone buys even one share of stock, they should feel safe knowing they are buying a real tangible thing and not something thatsomeone counterfeited.
Q. Are the proposed consequences for failing to deliver securities appropriate and effective measures to address the abuses in naked short selling? If not, why not? What other measures would be effective? Should broker-dealers buying on behalf of customers be obligated to effect a buy-in for aged fails?
A. I think the proposed consequences are a good step, but I feel they need to go further. The punishment needs to fit the crime and needs to be strict enough that it deters people from engaging in the manipulative abusive behavior. As the proposed consequences stand, it would still benefit these abusers to continue this illegal activity. Who will enforce these new rules and what is the end result if the laws remain broken?
Yes, broker-dealers buying on behalf of customers should be obligated to effect a buy-in for aged fails. One point of concern though, there needs to be some kind of system in place to insure that when these broker-dealers buy in the stock on the open market that they are in fact buying legitimate shares and not additional shorted shares from another broker-dealer. Otherwise in essence they will just be kiting the short sale from one broker-dealer to the next and this game could go on continuously. This is one of the major loopholes that needs to be addressed for these new rules to be effective.
Q. Is the restriction preventing a broker-dealer, for a period of 90 calendar days, from executing short sales in the particular security for his own account or the account of the person for whose account the failure to deliver occurred without having pre-borrowed the securities an appropriate and effective measure to address the abuses in naked short selling? Should this restriction apply to all short sales by the broker-dealer in this particular security? Should the restriction also apply to all further short sales by the person for whose account the failure to deliver occurred, effected by any broker-dealer?
A. Yes, I think the 90 day restriction preventing a broker-dealer, for a period of 90 calendar days, from executing short sales in the particular security for his own account or the account of the person for whose account the failure to deliver occurred without having pre-borrowed the securities IS an appropriate and effective measure to address the abuses in naked short selling and I further agree that this restriction SHOULD apply to all sales by the broker-dealer in this particular security. And yes, it should apply to all further short sales by the person for whose account the failure to deliver occurred. If they are abusing the system on one security, do not give the chance to do it in another. . If the rule is not put into effect this way, it will simply leave a loophole for people to open up multiple accounts, under different entities, with the same or several broker-dealers. PLEASE do not allow this loophole to exists.
Some points to consider on this subject would be, what is the penalty if they ignore this rule past the 90 day restriction? What is the penalty beyond that? How about suspending the broker-dealers license if they do not comply or settle the trade and freezer the persons account until a full investigation can be conducted into there trading? A stiff penalty indeed, but hey, no need to worry about them not complying with the new proposed rules. Those playing by the rules will have nothing to fear.
Q. Should short sales effected by a market maker in connection with bona-fide market making be exempted from the proposed delivery requirements targeted at securities in which there are significant failures to deliver? If so, what reasons support such an exemption, and how should bona-fide market making be identified?
A. No, short sales effected by a market maker should not be exempted for the proposed delivery requirements. This will only set the table for additional loopholes and will allow for continued abuses. Please do not take all these great steps that you have done and fail to close the lid on this problem by leaving holes in the system where Illegal activity can continue to occur.
Q. Under what circumstances might a market maker need to maintain a fail to deliver on a short sale longer than two days past settlement date in the course of bona fide market making? Is two days the appropriate time period to use?
A. I see no circumstances where a market maker needs to maintain a fail to deliver for longer then 2 days. If someone bought something, the person selling it to them should have no problem with delivering it to them.
Q. Are there any circumstances in which a party not engaging in bona-fide market making might need to maintain a fail to deliver on a short sale longer than two days past settlement? If so, can such positions be identified? Should they be excepted from the proposed borrow and delivery requirements, and if so, why, and for how long?
A. No, there are no circumstances that I can see. This again would simply provide a loophole for abuses to take place.
In closing, I would like to reiterate to the commission that some careful thought and consideration must be focused on rectifying all the Illegal Naked Shorted shares that exist on the books today in hundreds of securities on all exchanges and the OTCBB. As well as moving forward with new rules to close the loopholes that exist today, the past abuses need to be cleaned up. Please do not fail the American public in this area.
Thank you again for the opportunity to express my deep concerns over this very disastrous issue. I know the commission has there work cut out for them and I trust you all will do the right thing this time.